Friday, January 15, 2016

Long time ago, economics debates were dominated by Classic versus
Keynesian school of thought. Classic school advocates free market through price
mechanism while Keynesian school supports active government intervention in the
economy. Nonetheless, both mostly focus on accumulation and use of capital to
generate growth. Indeed, some may wish to take a bit from each school of thought,
which are the efficiency of competition under free market to generate growth and
role of government to ensure fruits of growth are share equally among citizens.

Adds some political flavor to economics theory, comes the term “people
economy”. Indeed, Bill Clinton’s 1992 United States Presidential election
campaign slogan is “Putting People First”. Somehow, similar slogan (“Rakyat
Didahulukan / People First”) is also used by Najib Razak in his 2013 Malaysian
election campaign and government policies. The people economy concept itself
brings two different perspectives. First is how the economic system and/or
government’s policy can maximize the welfare of the “people” (citizens). Thus,
“people” is the end focus of economy and acts as success-or-fail indicator of
economic system and planning. Second is the emerging trend of “people”
(human/labor/talent) in replacing capital (money/machines) as most important
input to the economy. Here, “people” is the beginning of economic process in
generating growth. We would like to combine both the first and second thought
for a fully people-centric economy. In this case, “people” will become an
important input while people’s welfare will be a desirable output to the
economy.

People welfare

Professor Dr. Robert
Pollin has published an article in New Labor Forum (2007, Vol. 16, page 9-17),
associating “people economy” as an egalitarian economy, where all members of society receive equal amount of goods, rights and
opportunities. He is Professor of Economics and
Co-Director, Political Economy Research Institute, University of
Massachusetts-Amherst, Economic Spokesperson, Presidential Campaign of Gov.
Jerry Brown and consultant to various United States agencies and departments.

Dr. Robert Pollin highlighted five objectives to
achieve and four obstacles to overcome for the United States to be an effective
egalitarian people economy that are also very relevant to Malaysia’s economy. The
five goals are (i) something close to full employment at decent jobs; (ii)
universal health care; (iii) dramatically expanding decent educational
opportunities at all levels; (iv) creating a clean environment on the
foundation of conservation and renewable energy; (v) rebuilding an effective
system of business regulations, in particular, in the areas of financial
markets and antitrust. These five objectives provide moral imperative for fair
economic system. There are four main economics obstacles most likely may
prevent the achievement people economy’s goals. They are (i) the federal
government’s fiscal deficit; (ii) the prospect of an investment strike by
private business; (iii) controlling inflation; and (iv) countering the
pressures resulting from globalization, including the trade deficit,
immigration and managing the dollar. Overcoming these four obstacles is also essential
for sustainable development.

Obstacle
1: Fiscal deficit

Malaysia
has been running budget deficit for many years. At its peak in 2013, fiscal
deficit reached RM45,056 million (see Table 1 and Figure 1). This is equal to
4.13% of gross domestic products (GDP) or 23.52% of revenue. Nonetheless, the
deficit reduced in 2014 to RM36,077 million, which equal to 3.25% of GDP or
17.44% of revenue.

In order to
further improve the fiscal balance, expenditure cutting as well as Good and
Services Tax (GST) have been implemented. No doubt those strategies are
necessary but various questions still linger? Yet, how effective can these
strategies help to solve fiscal deficit problem? Will these strategies (particularly
GST) bring negative side effects such as spiral inflation that can deteriorate
people welfare? Is there any other better solutions?

From
expenditure perspective, compensation to employees (public
servants) takes up large portion of total public expenditure in Malaysia and
its amount is too high. Public sector
grew so large. Since public servants are expected to vote for the ruling
government in election, public sector becomes “too-big-to-downside” and like a
cancer cell in Malaysia’s public finance.

Cutting
expenditure to reduce fiscal deficit is good but making sure every Ringgit
spent worth it is better. Table 2 shows “worthiness of
money spent” in term of “total operating expenditure to GDP” for Malaysia and
Singapore.

Malaysia’s total operating expenditure to GDP is twice larger than
Singapore. This implies every unit of currency Singapore spent yield twice
return as compare to Malaysia. In addition, the Malaysia’s figure has been rising
in the three years as shown in the table, thus putting extra difficulties to
overcome fiscal deficit obstacle.

Malaysia’s fiscal deficit is improving since 2014 and expected to
get better in near future. However, its cumulative of years of deficits will
eat up people welfare for years to come. Imposing new taxes on public like the
GST on one hand improve fiscal deficit but on the other hand burden the people,
thus also an obstacle to achieve truly people economy. Perhaps, drastic
downsizing and restructuring public sector are the answers. This Milton
Friedman’s (Nobel Prize in Economics) advice may be a valuable insight:

“The cure to big government is not by having a bigger government.
Instead, the most effective cure is to reduce the size of the government by
getting the government out of involving in businesses and prohibiting
government in engaging activities that can benefit certain groups.”

Friedman’s
advice reflects the economics classic school of thought – free market with
minimum government intervention – that forms the foundation for microeconomics
studies. In this case, it justifies the downsizing and
restructuring Malaysia’s public sector towards people economy. Preventing
government from favoring certain groups (selective business groups) can swing
the welfare from crony capitalists back to the people.

Obstacle
2: Investment
strike by private business

Investment
strike is blamed for British economic slump in 2008 and 2009 that had drag-on
effect until 2012. The
investment strike is a refusal by the private sector to invest. Thus, reduction
in interest rates may not be effective because firms are saving instead of
borrowing to invest. Micheal Burke (2012) claimed that investment strike caused
British pound fell by around 30% in 2008 and has recovered only a proportion of
that ground since. How about Malaysia
and its Ringgit?

Table 3: Growth Rate of Private and Public Investment and
FDI inflow (%)

Year

Private
investment

Public
investment

FDI
inflow

1996

15.8

3.2

5.0

1997

11.0

11.9

5.1

1998

-53.3

-0.3

3.0

1999

-24.1

3.1

4.9

2000

26.7

21.7

4.0

2001

-19.7

15.5

0.6

2002

-6.1

9.8

3.2

2003

-1.1

3.6

2.2

2004

15.8

-3.5

3.7

2005

8.5

1.9

2.7

2006

7.0

8.9

4.7

2007

12.3

8.0

4.7

2008

1.5

0.7

3.3

2009

-21.8

12.9

0.1

2010

13.8

5.5

4.4

2011

14.4

-2.4

5.2

2012

21.9

17.1

3.2

2013

13.6

6.3

3.7

2014

11.0

-4.9

-

(Source: Bank Negara (BNM) Annual
Report various years. Note: All growth rates are in nominal term except investment
in 2000, 2002 and 2003 due to lack of data available. Figures are quoted from
their respective years in BNM Annual Report (AR) to avoid discrepancy. However,
public investment growth for 2013 is quoted from BNM AR 2014 because figure
shown in AR 2013 (0.7%) is likely typing error). FDI Inflow is in percentage of
GDP.

Several unfavorable events around the world may again
trigger decline in Malaysia’s private investment as well as foreign direct
investment (FDI) inflow. Examples of those events are continuous oil price
slump (Malaysia as net oil exporter), political uncertainty (which include
variety of corruption scandal brought up and spread into international news), low
value of Ringgit and potential global economic crisis due to economics problem
in countries like Greece, China, Costa Rica, Argentina, Brazil and Venezuela.

Decline in private investment will negatively affect
economic growth. Subsequently, reduce in growth (or even recession) may decline
people welfare. This is a potential obstacle we should ensure it would not
become reality.

Summary

Budget deficit reduces ability of government to
provide people-oriented welfare or increase development expenditures that are
needed to generate higher growth. Various potential social, political and
economic factors domestically and internationally put investment growth into
serious danger. Decline in investment cost loss of employments and negative
impact to economic growth. All these are serious obstacles for the government
to achieve what they have promised – people-economy.

[Chinese version published at 南洋商报经济周刊 Nanyang Press – Business News, page A8 on 11th January 2016. Available online at http://www.nanyang.com/node/743403. This English version may be slightly different from the Chinese online/printed newspaper version]

European’s
Industrial Revolution between 1760 and 1840 was sparked by Renaissance in the
15th to 17th century. Renaissance encompassed vast
reformation and improvement in all non-economy aspects, which are humanism
(moral philosophy, poetry, rhetoric and history), art (including architectural
design), science and music. It also involved reformation of religion thoughts
especially from merely “God-after life” centric to “self awareness-current
life” centric. Subsequently, improvement in all these aspects helped boost
remarkable progress in economy and income growth.

Japan’s
economic revival after World War II destruction was due to strong nationalism
and work ethics. Marx Weber credited strong economy in Northern Europe to
Protestant Ethic of Calvinism and its “Spirit of Capitalism”. History has
preceding thought that economic growth (and its subsequent high income) are
enable by strong fundamental of non-economic aspects, particularly social,
moral and ethic. Thus, it is weird that Malaysia’s contemporary economic goals
merely has income growth (material wealth) as its target and forgotten the
non-material wealth aspects.

Voiceless and Rootless
Growth

Anwar
Ibrahim in his book The Asian Renaissance
(1996: 81) believed that economic growth is necessary but the issue is what
kind of growth. He highlighted five types of growth with negative consequences
to be avoided as identified in the Human Development Report 1996. They are
“jobless growth” where economics growth does not come with expansion of
employment opportunities, “ruthless growth” in which the fruits of economics
growth mostly benefit the rich, “voiceless growth”, which does not empowered
people but silences alternative voices, “rootless growth” that causes the
people’s cultural identity to wither and “futureless growth”, where the present
generation squanders the resources needed by future generations.

Malaysia’s
growth is now going towards “voiceless” and “rootless”, results from over
focused on material richness and internal political malady. Use (or misused) of
Sedition Act and Security Offences (Special Measures) Act 2012 to the extent of
preventing criticism to ruling government
greatly eroded Malaysia’s richness in freedom of speech. Over-developed
with infrastructure projects, skyscrapers, shop lots and new industrial areas
could endanger cultural heritage as well as richness in environment, flora and
fauna. Individual citizen’s desire on getting higher and higher income brings
inevitable negative consequences including less friendship value, erosion of
filial piety value, late marriage, fail love relationship or domestic violent
due to money matters, less time for exercise and higher crime rate. We gain
income richness but loss other non-material richness.

Two famous development economists, Michael Todaro
& Stephan Smith in their Economic
Development textbook (2014) identified three core values of development,
which are “sustenance”, “self-esteem” and “freedom from servitude”.
“Sustenance” refers to the ability to meet basic needs needed for everyday
living such as food, shelter, health and protection. In general, Malaysia has
already fulfilled the basic of “sustenance” for majority of its citizen. In
addition, ETP and other economic policy do emphasis fairer distribution of economic
wealth as one of its objective. Yet, what planning may be different from actual
implementation. Little Napoleons in public bureaucracy can divert noble
objectives in national economic and social plans.

In term of “sustenance”, Malaysia does achieve
satisfactory results. Table 1 shows some comparison between Malaysia and
ASEAN-5, developed Asian countries (Japan, South Korea and Hong Kong) and few
other developed countries. Carbon dioxide (CO2) emission (proxy for
environment), vulnerable employment (social economy welfare), Life expectancy
(health) and GDP per capita (income richness) are used as comparative
indicators.

Table 1: Comparative Condition: Environment,
Employment and Health

Country

CO2 emissions (kg per
PPP $ of GDP)

Vulnerable employment
(% of total employment)

Life expectancy at
birth, total (years)

Malaysia

0.39

21.44

74.33

ASEAN-5

Indonesia

0.23

62.00

69.92

Singapore

0.06

9.76

81.15

Thailand

0.36

53.22

73.55

Philippines

0.16

42.52

68.08

Developed Asia

Japan

0.28

10.65

82.69

Korea, Rep.

0.37

25.00

80.20

Hong Kong

0.12

7.00

82.78

Other developed
countries

Australia

0.42

9.15

81.56

Germany

0.24

6.90

79.97

United Kingdom

0.22

10.96

80.09

France

0.16

6.66

81.50

(Data source: World Bank, 2015)

Malaysia’s development conditions relative to other
countries. Overall, Malaysia has lower vulnerable employment than South Korea
and all ASEAN-5 countries except Singapore. This implies moderate social
economic condition with plenty of room for improvement for Malaysia.
Nonetheless, Malaysia has a very bad environment condition. Malaysia’s carbon
dioxide (CO2) emission per Gross Domestic Product (GDP, measured by purchasing
power parity) is relatively higher than all selected countries except
Australia. Note that haze pollution is not considered in this data, which come
from “stemming from the burning of fossil fuels and the manufacture of cement, include
carbon dioxide produced during consumption of solid, liquid, and gas fuels and
gas flaring”. Haze originated from Indonesia is like an annual occurrence. It
not only jeopardizes contribution of tourism and palm oil to GDP growth but a
serious health hazard that income growth cannot compensate.

Malaysia is also has relatively higher life expectancy
than all ASEAN-5 except Singapore but lower than all selected developed
countries. Indeed, Singapore serves as a good benchmark for Malaysia to strive
forward. Unfortunately, it seems that authorities and politicians in Malaysia
tend to compare our social economic level to less developed countries. This
prompts question that are we looking backward?

“Self-esteem” is seen as a sense of worth and
self-respect, or not being used as a tool by others for their own ends. Raising
levels of living through higher income, more employments, could serve to
enhance material well-being but better education, healthcare and greater
attention to cultural and human values also needed to generate greater
individual and national self-esteem.

“Freedom from servitude” associated with human freedom
and ability to choose. This core development is the most lacking part in
Malaysia. Is it due to over-emphasis of stability and high income? Do
Malaysians need to obediently live like a bird in the cage in order to get
luxury feeding and protection from predator?

Basedon
Table 2, Malaysia has lowest Freedom Index and second lowest ranking for World
Press Freedom Index. Malaysia’s economic freedom is higher than Indonesia,
Thailand and Philippines but lower than Singapore (similar comparative trend)
and all other developed countries except France. When Malaysia moving forward to high income,
do we need to scarify freedom? Well, at least Singapore who three ranks lower
than Malaysia looks comfortable with their restricted press freedom.

Danger of No Greed

Over
greediness is harmful for inclusive growth (equality) and sustainability.
However, lack of greed is also no good. From the economics perspectives, at
least one person claim “yes, greed is good” – Adam Smith of the classic school.
Through his theory of invisible hand, market can achieve efficiency when
consumers and producers try to be greedy by maximizing their utility and profit
respectively. Despite ‘promoting’ greed is good, Adam Smith’s idea of free
market is actually originated from his Theory
of Moral Sentiments that uphold moral value in society and economics. This
actually supported call for “balance between reward for constructive greed and
restriction by moral responsibility”.

A
Professor once shared her experience on evaluation of a government’s program to
help the poor villagers in remote area of Sabah. The aims of the program are
noble, which are gave the villagers there young livestock (chicken, goat and
cow) to rear and paddy seeds to plant. It ended with villagers finishing those
livestock and planted the paddy at nowhere. Yet, they retained the last portion
for the visiting officers who came to evaluate them. Those villagers were happy
to live a simple life.

Friends
doing social-economic surveys were shocked that rural residents were very happy
with their simple (but financially poor) life. Those rural residents biggest
dream may be just to buy a new motorcycle. Their best, farthest or dream
destination to visit is merely a local tourist spot.

Greedy
to get everything for personal benefit is not advisable but have some
acceptable level of greed to dream big is one of the key for success and
progress. Big dream (not the classic daydream tale of Mat Jenin) stimulates
progress for individual and growth for the country.

Conclusion

Economic
growth is like a holy grail to every nation. However, wrong direction of growth
towards voiceless, rootless and greedy paths will lead us to darkness.
Narrowing our growth target to high income can lead us to those dark directions.
In contrast, widening the growth target to include variety of people welfare (non-material
wealth) is like dispersing the fogs that blind our true path to noble economy.

[Chinese version published at 南洋商报经济周刊 Nanyang Press – Business News, page A7 on 3th November 2015. Available online at http://www.nanyang.com/node/736612. This English version may be slightly different from the Chinese online/printed newspaper version]